Sterlite Industries regaining Street confidence

Analysts are turning positive on reasonable valuations and better contribution from zinc, power and copper businesses

Sterlite Industries is once again attracting analysts’ attention, especially after the recent quarterly results, which were ahead of expectations. Many of them are now turning positive on the company due to reasonable valuations. More importantly, analysts believe that the contribution of zinc, power and copper segments is going to be better than expected, helping the company sustain decent growth rates.

Thus, they have raised the target price for the company to Rs 125-130 per share, which is almost 25-30 per cent higher compared to its current share price of Rs 100. Given lower uncertainties and better visibility now, there is also a possibility of the stock getting re -rated.

“We like Sterlite Industries as we believe most of the negatives (largely regulatory) are now priced in and the valuations are attractive at five times FY2014 price to earnings. Also, with the impending merger, Sterlite has a well-diversified business model with high quality zinc and oil assets and steady expansion plans across verticals,” says Varun Lohchab, who tracks the company at Religare Capital Markets.
 

HOLDING UP PROFITABILITY
In Rs crore	FY12	FY13E	FY14E
Revenue	40,967	43,345	47,116
% change y-o-y	16.4	5.8	8.7
Ebitda margin (%)	24.3	24.1	24.8
Bps change y-o-y	-171	-20	70
Adjusted net profit	4,828	5,939	6,664
% change y-o-y	-4.3	23.0	12.2
EPS (Rs)	15.8	17.7	19.8
PE (x)	6.2	5.6	5.0
Source: Religare Capital Markets

Q2: Ahead of expectations
Sterlite, which is a leading player in the non-ferrous space, reported a whopping 71 per cent year-on-year (YoY) growth in adjusted net profit at Rs 1,743 crore for the quarter ended September 2012. This came despite a mere nine per cent growth in revenues to Rs 11,103 crore and marginal increase of 1.8 per cent in operating profit to Rs 2,527 crore. Though net profits were boosted by forex gains of Rs 219 crore, higher other income and lower interest cost, the operational and overall performance were better than expected. This saw the stock rise nearly two per cent on Thursday, against a 0.3 per cent rise in the Sensex.

Notably, led by higher London Metal Exchange (LME) prices, realisations across segments were better than in the June 2012 quarter, which along with volume gains in the aluminium and power businesses saw the operating profits rise by nine per cent to Rs 2,453 crore—more than double the 4.1 per cent rise in sales.

During the quarter ended September 2012, Sterlite Energy generated 1,940 million units, up 71 per cent compared to the year-ago period, as a result of higher sales and plant load factor (PLF) at its Jharsuguda-based 2,400-Mw power plant.

The aluminium business also earned higher realisations (premium over LME prices) due favourable regional demand-supply situation, a trend likely to sustain in the near-term. However, the gains from the aluminium and energy businesses were offset by poor performance of the copper and zinc businesses, which witnessed lower volumes and decline in margins.

Outlook
Going ahead, analysts expect realisations to remain better in the next year across segments. However, production in the copper and aluminium businesses is expected to remain stagnant. Vedanta Aluminium started a one million tonnes (mt) alumina refinery, but the same is facing challenges in terms of sourcing of bauxite, a key input. At Balco, the first power unit (300 Mw) of the 1,200-Mw plant and a smelter are expected to commence operations over the next two quarters, but analysts are not confident of any volume gains here as well.

“We are not considering any aluminium production from this plant in our forward estimates. The company is negotiating with Coal India to sign FSAs for two out of four units of 300 Mw of this 1,200-Mw power plant,” says Prasad Baji, analyst at Edelweiss Securities, in a recent note on the company.

In contrast, the volume gains could come from the zinc business. The company said the Rampura Agucha underground mine and Kayar mine projects are progressing well to deliver commercial production in FY2014.

Analysts thus, are expecting zinc production to go up to 750,000 tonnes per annum from 700,000 tonnes now. Similarly, the number of units of power that the company could sell next year is expected to double, given the developments at its power business (Sterlite Energy).

The company said that coal sourcing is no longer a constraint for Sterlite Energy and there is a possibility of the PLF increasing from 50 per cent in the September 2012 quarter to 75 per cent in the coming quarters. Additionally, the first unit of the Talwandi Saboo power plant (three units of 600 Mw each) is expected to be synchronised in the second quarter of FY2014, which will further add to volumes.